Mar 24, 2009

Saving glut or… investment famine?

by Ugo Pagano

The financial crisis is often blamed on a saving glut, while protectionism is almost unanimously viewed as its most dangerous potential consequence. But it is more likely that the crisis is due to a famine of investments due partly to protectionism camouflaged behind the blessed principles of ‘intellectual property’.

The immediate causes of the crisis are often seen as being the lack of regulation and the expansionary policies of the Fed, which by keeping interest rates artificially low, has provoked an excessive supply of saving. As amply explained by the well-known models of adverse selection, the latter has in turn produced a growing pool of toxic debt, with the consequences by now evident worldwide. According to an article in the Economist of last January, a beneficial “flow” of saving has turned into a disastrous “flood”, but this flood is more due to “global imbalances” generated abroad than being an endogenous product of the American economy and policies. Governor Bernanke has long argued that the role of the Fed in credit expansion has been marginal, and that the prime cause of the crisis has been a saving glut forced on the United States by massive inflows of savings from other countries.

There is something appealingly infantile in Bernanke’s argument. For many of us (and for me at my mother’s), ‘bellyfuls’ and the indigestion which they cause are due to the excellent and over-abundant food that is served. The real weakness in Bernanke’s thesis, however, is not so much its infantilism as the inaccuracy of its content. As shown by the data set out in the Bank of France paper by Moec and Frey, there has been no overabundance of savings in other countries, but rather a famine of investments. In recent years, savings have not grown around the world; instead, and especially outside the United States, investments have diminished. In other words, the abundance of food in America has been the result of a blockage in the digestive systems of its neighbours. It can be argued that, in this situation, the Americans have generously done the digesting on behalf of other countries, and give them transfusions of pre-digested food. Part of the saving absorbed by America, in fact, has been injected in the form of direct investments in countries suffering from blockages in their digestive systems. Is it therefore not the fault of the neighbours if they have been unable to create suitable investment opportunities and if, moreover, they have poisoned the Americans with their flood of savings?

The problem is that the lobbies for the American multinationals, by applying pressure for the new architecture of international trade founded at Marrakech in 1994, have played a major role in causing the blockages of their competitors’ digestive systems. We may start from 1992, when George Bush Senior concluded a presidency replete with success in foreign policy which saw, among other things, the collapse of the socialist economies and the disintegration of the Soviet Union. Yet the slogan “It’s the economy, stupid!” was enough to make him lose the elections against Clinton. The cause was not so much the economic crisis which began in 1990 as the consolidated perception that the “American model” was falling behind the alternative Japanese and German models. In the previous decade, a huge body of studies had described the miracles of Japanese management and suggested various ways in which the Americans could imitate it. By the end of the 1990s the situation had gone into reverse. The United States (and the United Kingdom) had become the model to imitate, and yesterday’s heroes (not only Germany and Japan but, after the 1997 crisis, also all the Asian tigers) strove to restructure their economies on the so-called Anglo-American model. In the meantime the Chinese economy had undergone rapid development. What had led to this unexpected reversal?

The explanation may lie in the standard liberalist refrain: only the Americans (and the British) had suddenly have rediscovered the virtues of the market, thus offering numerous investment opportunities precluded to their rigid competitors. However, on closer inspection, it was not the virtues of competition, but rather the advantages of intellectual monopoly, which enabled the United States rapidly to catch up with the other Western economies. Indeed, in the first half of the 1990s, the United States no longer had global military and political rivals. It was thus able to reorganize the world economy so as to enhance its scientific and technological leadership, and above all its monopoly positions, to the maximum.

The salient features of the new world were contained in the TRIPS agreement signed at Marrakech on 15 April 1994. Significantly, TRIPS was the 1C annex to the agreement founding the WTO. The preamble to TRIPS states as self-evidently obvious that “intellectual property rights are private rights” like all other private property rights. Yet this obviousness would have been unknown to an innovation economist of Schumpeter’s calibre, and it has been recently disputed in Boldrin and Levine’s fine book Against Intellectual Monopoly. Whilst the granting of property rights (including intellectual ones) constituted the natural basis for free trade, ratification of TRIPS necessarily created an annex to the WTO agreements, and an obligatory requisite for access to international trade. Unlike all previous international agreements on intellectual property, the inclusion of TRIPS in the WTO constitution created an efficient mechanism with which to enforce intellectual property rights. States could now be disciplined through the institutions of the WTO itself; and, in extreme cases, access to international trade by intellectual property “thieves” could be restricted.

Notwithstanding the seductive rhetoric extolling free trade and private property, the Marrakech agreement surreptitiously introduced super-tariffs such that the most extreme protectionism pales into insignificance. Since TRIPS, intellectual property rights have become global monopolies; that is, in a certain sense, customs tariffs of almost infinite magnitude. Not only are competitors of other countries not allowed to export a good to the country of the intellectual monopolist, they are also prohibited from producing it in their own country. When multinationals of some countries organize themselves into “patent pools”, the economic desertification of that sector in other countries becomes inevitable, resembling Britain’s erstwhile levies on its colonies, especially India (Marcello De Cecco, Money and Empire, Rowman and Littlefield, 1975).

With notable exceptions like Krugman, a chorus of alarm at the dangers of impending protectionism has been raised in recent months. It is claimed that one of the worse effects of financial crises is the disruption of free trade. Yet the relationship between the two phenomena has a chicken-and-egg complexity which does not admit to easy solutions. It is certainly true that the crisis is generating protectionist attitudes and the resumption of economic nationalism. But it also true that protectionism, by appropriating the blessed principle of private property rights, has helped produce the financial crisis. It initially only reduced opportunities for investment outside the United States, while the latter, thanks to direct investments by its multinationals, for a certain time also ‘digested’ for others. In fact, as Moec and Frey show, the crisis was preceded primarily by a fall of investments outside America. This fall was initially attenuated by the direct investments of multinationals endowed with an unbeatable recipe based on American intellectual monopoly and low-cost Chinese labour.

Added to the fall of investments by other countries was a gradual digestive blockage of the American multinationals themselves. Already in July 2005 an article in the Economist talked of a “corporate savings glut”, and its subtitle noted that the great corporations, more than the emerging economies, had become the world leaders of the global switch to thrift. The same article then referred to Keynes’ famous paradox of thrift whereby if everyone wants to save, they must (in the absence of investments) reduce their saving … though they naturally first go through speculative bubbles and various “financial innovations”.

In conclusion, although the financial crises have provoked protectionism, the super-protectionism of intellectual property has driven down investments. This has happened in two stages (largely overlapping in time) and through two mechanisms. The first stage after TRIPS saw the launching of the Chinese-American model and a shift to investments designed to consolidate American intellectual monopolies. As new spaces opened up for the American companies super-endowed with these “resources”, numerous opportunities for investment were closed to Japan and the former Asian tigers, which had neither America’s monopolistic endowment nor China’s lower costs. This phase culminated in the Asian crisis of 1997. In the second stage, because of the mechanisms described in the well-known tragedies of the anti-commons, world intellectual monopolies became too pervasive and began to block each other. At this point the accumulation mechanism used by the great “knowledge owners” became jammed as well. The fall in investments therefore created some of the factors that led to the financial crisis, and the latter in its turn drove investments down to further depths from which it will be difficult to re-emerge without a significant number of economic policy measures. One such measure should engender an investment super-multiplier by combining Keynesian policies, on the one hand, with the capacity for knowledge to be used infinite times without deterioration on the other. Support for aggregate demand and the re-appropriation of knowledge may constitute the two components of a single policy intended to free innovation from the cage of intellectual monopoly and to furnish greater investment opportunities for everyone.

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Mar 15, 2009

Anti-crisis policies in the Czech Republic and Slovakia: what do they have in common?

By Lucia Kurekova and Katka Svickova

Czech Republic and Slovakia have diverged in their developmental paths and policy choices over the course of transition. In spite of common institutional legacy and very similar export profiles, sixteen years after separation, the policy choices frequently differ, perhaps not least because of opposing political orientations of their governing elites during different periods of transition. This is the case also today, when individual countries are facing the world economic downturn in their local shapes and forms: Slovakia is governed by social democratic/third way SMER in coalition with centre-right HZDS and nationalist SNS while the Czech Republic is headed by a centre-right government of Miroslav Topolanek. In spite of many similarities in how the crisis has been affecting these two countries, which are both heavily dependent on automotive industry, the remedies that the governments have passed are quite different.

The governments of both countries, however, shared a similar initial denial that the global crisis might have any significant effects on their domestic economies. In both countries, too, the opposition was coining a different message and suggesting their own recipes for a remedy. And in both countries, the governments have not been really listening to these voices. While the wounds to the economies of both countries have been caused by a deep dip of external demand for their exports of consumer durable goods, the reactions of both countries in the form of adopted anti-crises measures have been different. Is the reason for these different reactions an underlying difference in the state of these economies, as persuasively argued in the last week’s issue of the Economist, or is it purely an outcome of different ideological orientations and tastes of the governments steering the countries?

To summarize, the set of Czech anti-crisis measures has a strong pro-business flavor while the Slovak government has concentrated more on supporting the ‘ordinary citizens’ and keeping employment almost at any cost. Further, while the Czech measures are partially forward-looking and have a modernizing aspect (support for environmental measures, increase of R&D investment), this can hardly be said about any of the three Slovak anti-crisis packages. While the government of Robert Fico fiercely refuted any opposition calls to decrease further the 19% flat tax rate, the “tax package” that it passed in the end will make most of working Slovaks richer by about 10 euro per month via the raised tax deductible minimum. The Czech Republic, on the other hand, will not only reduce the corporate tax by another 2% in the next two years (only reaching, however, the current Slovak level of 19 %) but has also decreased social insurance deductions on salaries for employees by 1,5%. Instead of up to 2000 euro ‘srotovne’ (bonus on buying a new car and recycling an old car) passed after its success in Germany last week also in Slovakia, the Czech Republic decided to reduce the VAT for cars. Additional changes to the administrative and institutional business environment in the Czech Republic include an amendment of the insolvency law, faster depreciations, an abolishment of the obligation to pay an advance on income tax for self-employed and small enterprises (below 5 employees) or enhancing the provision of export loans to businesses and loan guarantees for SMEs. The overall goal is to reduce the cost of labor and thus, desirably, preserve employment and facilitate the cash-flow for businesses. Fairly enough, Slovakia passed a handful of pro-business oriented measures too, among them easier book-keeping for self-employed and SMEs, faster depreciations, a quicker return of VAT to businesses or state guarantees for loans (up to 55% of the loans for companies employing less than 100 people).

However, the core of Slovak anti-crisis tools is in its ‘social package’. The leitmotif of the government is ‘keeping employment at any price’, which is not surprising in the light of the Slovak structural (read “high and persistent”) unemployment nightmare that has been present during the whole transition. Yet the set of job creation measures passed by the government is not only extremely complicated, but there are fears that many of them are very corruption-prone and might lead to more – rather than less - red tape. Measures such as state help to employers who are experiencing serious operational problems to cover the compulsory health and social insurance payments for their employees for a maximum of 60 days, or intentions to subsidize new jobs for a period of 12 months up to 15% of the costs of a new job in Bratislava region and 30% in the other regions of Slovakia are only examples of ways where crony practices and potential waste of money are likely to loom in unless the system is properly monitored and the support is given to enterprises with good prospects of future growth and innovation. The law on the support for one-man businesses started during the crisis, for example, had to be amended shortly after it came into effect following cases of its misuse.

There are a few instances, however, where the countries seem to stand out in a positive way. Bratislava has been praised for keeping its investment incentives to foreign firms - and extending them to domestic investors. Czech Republic, on the other hand, plans to invest more into R&D, a field where nearly every country has been trying to save during the crisis. Both of these measures are forward-looking. And although they are unlikely to act as immediate fire-fighters against the slump, which is projected to be the deepest in the next moths, the countries will be grateful for them in the mid-term to long-term period.

To answer our question from the beginning on the cause of the divergence of policy reactions in the two countries, the color of the governing coalitions seems to explain a lot of the outlined differences. At the same time, however, Slovakia has a long-lasting experience with high unemployment to which the society is extremely sensitive. In addition, both countries will need to deal with the issue of migration, but from very different ends: the Czech Republic is trying to figure out how to send back some of its foreign labor that has served it well until now, while Slovakia should start monitoring who and in which proportions is coming back to the country from nearer (Czech Republic) or farther abroad (Britain and Ireland). Lastly, Slovakia, now an EMU member, is not spending any of its energy on defending its currency, while the Czech Republic is less lucky in its respect. But then – it has one more tool at hands in dealing with the crisis cycle and its exporters are more competitive than the Slovaks exporters.

This brief comparison of reactions to the domestic repercussions of the world economic crisis in two Central and Eastern economies also contributes to underline a broader trend of divergence in the development of the countries from the whole Central and Eastern European region, despite a shared legacy as centrally-planned economies.

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Mar 12, 2009

5th CEU Graduate Conference in Social Sciences

PERG organizes panels on political economy at 5th CEU Graduate Conference in Social Sciences: “Old Challenges in a New Era: Development and Participation”

19-21 June, 2009
Central European University
Budapest, Hungary

2009 represents a crucial year which is testing our ability to deal with substantial political and economic challenges. Bringing a continuation of the economic crisis, the deepening of the Israeli-Palestinian conflict, a new American administration, and a severe energy crisis for several of the EU members, this period is proven to be a problematic reality check for our policies and theories. Reality shows to be one more time ahead of scholars’ conceptualizations, politicians’ capabilities, and policy-makers’ solutions. With the many challenges ahead, we hope to generate interdisciplinary academic debates that tackle relevant topics in their fields of research. At the same time, we hope to connect different perspectives and approaches in order to produce high standard academic works.
We encourage graduate students and young faculty to contribute with papers and panel proposals on multiple topics. The working language of the conference is English.

Political Economy Research Group (PERG) at CEU has taken over the organization of the panels related to political economy, more specifically:

• Political economy of foreign direct investment
• Diversity between forms of capitalism in the world
• Political economy of the enlarged EU
• Political economy of development and poverty

For a list of all panels visit:

We particularly welcome panels proposed by scholars coming from different institutions. A panel can be proposed using the special panel form and should be accompanied by the titles and abstracts (maximum 300 words) of five papers included in the panel. Application forms can be downloaded from All applications should be sent to

- The deadline for panel proposals is April 1, 2009.
- The deadline for paper proposals is April 15, 2009.
- Accepted applicants will be notified by April 30, 2008.
- Applications after deadlines are not be considered.

The paper applications consist of:
- Completed application form (Including the abstract – max. 250 words)
- Short CV (maximum 2 pages)
- (Optional) Applicants for travel grant: Short letter for justification (up to 300 words)

The panel applications consist of:
- Completed application form
- Short CV of the panel chair (max. 2 pages). Panel chairs have the travel costs covered up to a certain amount.

Financial support:
There is no registration fee for qualified participants. Food and
accommodation are provided by the organizers. Applicants can apply for
a partial travel grant for the cheapest means of transportation. Those
intending to apply for a travel grant should write a short letter of
justification (up to 300 words).

NOTE: In case you do not receive confirmation within 72 hours please re-send your application.

For further inquiries about the conference please e-mail to:

For more details about PERG visit:

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Mar 4, 2009

Post-Doctoral Fellowship at DISC (CEU) in Budapest

Call for Applications
The Center for the Study of Imperfections in Democracy (DISC) at Central European University is pleased to invite applications for a postdoctoral position for the 2009-2010 academic year from scholars holding a recent PhD degree in political science, economics, sociology, or other relevant social science disciplines and pursuing research that is relevant for DISC’s research agenda (

The selected candidate will further strengthen existing research on the qualities of democracy and contribute to the institutional development of DISC. Potential topics for research include: forms of political inequalities in democracies; typologies of labor market regimes; measures of social inequalities; types of capitalism and their relation to social inequalities.

The successful candidate is expected to have a solid background in comparative social research and experience in working with micro- and macro-level data. A specialization in the fields of democratization, social inequalities, and/or political economy of labor markets is welcome. Advanced knowledge of cases in either Europe (East, West, or South) or America (North, Central, or South) is of benefit.
The position is a full-time position, lasting for 10 months. Compensation is competitive and commensurable with experience. In addition, we offer a dynamic and international academic environment.

Carsten Q. Schneider, PhD
Associate Professor
Director of DISC

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